Magazine

A New Road Map For California

October 19, 2003

Californians have been throwing a populist fit for decades, and the recall of Governor Gray Davis and election of Arnold Schwarzenegger is the latest manifestation of that discontent. Californians want low real estate taxes but keep passing initiatives for more spending on schools, health, and prisons. They want cheap illegal

Mexican labor to work in hotels, farms, and construction but don't want to give them drivers' licenses. They want deregulated electricity but not for consumers. They want balanced budgets but impose impossible supermajority votes to pass them. They want more jobs but subject small companies to heavy legal and health mandates that make them uncompetitive. They want better political governance, but they vote for term limits that make legislators rely on special interests -- and recall governors they just voted into office.

Californians want a lot of things, but not this: to make reasonable choices and pragmatic compromises to get things done. If Schwarzenegger is to succeed in digging California out of the hole it has dug for itself, then he must use his outsider, celebrity status to build a new political consensus to make California work again. If he fails, the flight of professionals and businesses from California to Idaho, Texas, Nevada, Oregon, Washington, and Utah could become a rout.

Unfortunately for California, a strong cyclical upturn in the economy may soon alleviate the obvious symptoms of its deep structural problems. The three pillars of California's economy -- high tech, global trade, and agriculture -- are all showing signs of better health. The state's $8 billion budget deficit will improve by mid-2004, even if the new governor does nothing.

But doing nothing would be a major mistake. California is becoming less and less competitive. The state needs major economic and political repair, and there is no consensus on what to do. One suggestion would be to check out Texas. Take electricity: Texas keeps its power local, stable, and half the price of California's. While it has deregulated to a degree, it never made California's blunders. Texas has also managed to keep its state workers' compensation system under control -- while in California, premiums paid by businesses doubled last year. Recently, Governor Davis signed a bill increasing workers' compensation payouts by 100%, and premiums will rise again. Davis also added to the cost of doing business in his state by requiring companies with 20 employees or more to provide health plans for all workers or pay a fee to a state-run health plan. This pummels California's 1.1 million small businesses that employ 80% of working-age residents. Many plan to move.

California will never be a low-cost state. It makes sense for it to concentrate on high-value-added services in tech, media, design, trade, advertising, and venture capital, allowing some production to migrate to low-cost states. But the new governor would be wise to roll back some of the expensive new mandates just passed. Good intentions do not necessarily make for good economic policy.

Californians should realize that their hothouse populism has made them virtually ungovernable. Voter initiatives mandate 70% of all state spending, limiting the negotiating room that politicians need to deal with budget crises. And requiring a two-thirds supermajority vote of the state legislature to pass a budget in effect paralyzes government. This has to change. At partisan war with itself, California has only itself to blame. Perhaps that's why Californians have turned to a larger-than-life figure -- to make them do what they know they need to do.